Lesson 5

Topic: Bank Accounts – Types of services banks offer and what they are. (45-60 min)

Goal: To have students learn about the different types of bank accounts that exist and what each type is used for. To know the difference between a deposit account and a loan account.

Lesson Overview:

Class discussion – What do they know about Banks and Banking? Review from last lesson.

Video – Middle School Money Matters Video #5 – Types of Bank Accounts

Paper activity – Deposit or Withdrawal and Borrowing or Saving?

Sample Budget - Discussion

Wrap-up or Extension activity

Class discussion: What do they know/Remember from last lesson about banks and banking? Engage the class by asking what they know about the accounts and services banks offer. What are Canada’s Big 5 banks again? How are they the same? How are they different? What is a bank account? What different types of bank accounts do banks offer? Why should you have a bank account? What conveniences do they offer? Do you think banks make money on bank accounts? If not, Why do banks offer accounts for free? (How do banks make $ from your account – fees, services, drafts etc..) What are the different types of accounts offered by Canadian banks? Do you think people need more than 1 bank account? Why or why not.

Video: Middle School Money Matters video 6-5 ‘Types of Bank Accounts’.

Background Information/Lecture:

There are two main types of accounts banks offer to individuals – accounts where you deposit money with the bank, (like savings accounts) and accounts where you borrow money from the bank (like loan accounts).

Within these two broad categories there are several main types of accounts many people have:

Deposit accounts include

• Savings accounts/Checking accounts

• Term deposits such as GICs

• RSP accounts (retirement savings accounts)

• Tax-Free savings accounts

• RESP accounts (education savings)

Loan accounts include

• Credit cards

• Personal loans (consumer loans like car loans)

• Line of Credit

• Mortgage (loan on a house)

*How many of these did the class come up with during the earlier discussion? Go over a brief explanation of each type of account (information below). One option is to photocopy each of these paragraphs and have small groups read them over, even do a little more searching online, and then share out with the class on their type of account and how and what it is used for.

Savings/Checking account: This is your standard account usually connected to your debit card. The terms savings and checking are almost irrelevant at this point as the use of cheques for payment is disappearing quickly in favour of electronic transfers. The names nowadays usually just serve to distinguish one account for from another, a person might have two accounts, one they call checking where they do the majority of their banking transactions and one labelled savings where they deposit money and save up for one reason of another. A kids savings account is usually where young people start out to learn how to deposit and withdraw money and use a debit card. Generally the middle school years are when most Canadian parents help their kids open their first bank accounts.

Term deposits such as GICs: As financial interest rates have been very low for decades, banks tend not to pay too much interest or none at all on regular bank accounts. If a person wants to earn a little interest on their money they can put their money in a term deposit called a Guaranteed Investment Certificate or GIC. This is an account where you as the client agree to leave your money on deposit for a given period of time in exchange for a higher interest rate. The money is less flexible (not as easily accessible) as money in your regular bank account. Perhaps you agree to leave your money on deposit for 1 year at 2% interest. That means if you deposit $100, at the end of that year the bank will give you back $102. Now this does not sound like much, but imagine if you had $1,000,000 on deposit, you would earn $20,000 in interest for that year!

Retirement accounts (RSPs): This is a special type of savings account where if you deposit money into it, you can deduct the contribution amount from your income at tax time essentially postponing the payment of tax on this amount of income. For example if you were in a 20% tax bracket and had income of $50,000, your tax owing would be $10,000. But if you deposited $10,000 into an RSP account you would not pay tax on that amount so your net income would only be $40,000 so you would only owe $8,000 in tax. You would still have the $10,000 in your RSP account but would have saved $2000 in tax. Now what happens is it is simply a postponement of tax as you pay tax on any money you withdraw from an RSP so it only really works if you deposit the money when you are in a high tax bracket (when you are working and earning a lot) and then withdraw the money when you are in a lower bracket.

Tax-Free savings account: This is a newer type of registered account which allows people to earn money on investments within the account tax-free. While there are no tax deductions initially like on an RSP, there are also no tax penalties upon withdrawal because the deposits have already come from your after tax income. These work well as a savings account for those in low to medium tax brackets.

RESPs (education savings accounts) work like a tax free savings account so parents can save for their children’s post-secondary education. They have an added bonus that the Canadian government offers percentage grants on contributions so for example if you deposit $1000 the government will give you a 20% grant ($200) so essentially your contribution makes 20% right away.

Loan accounts:

Credit cards: Credit cards are by far the most common type of loan account. Visa and Mastercard are the two largest global players in the credit card business, but there are other smaller companies as well such as American Express (which is popular in the US but not really elsewhere). The credit card companies have a complex relationship with the banks as they really require the banks to act as their agents even though they are in fact separate companies. Without getting into too much detail about this relationship, let’s go over the main features of credit card accounts. In the new electronic world in which we live in, it is becoming harder and harder to manage without a credit card. From online shopping to renting hotel rooms or cars or pretty much anything, most of it can’t be done without a credit card. A credit card is a way of saying that – a company has vetted me and says I’m good for this amount of money. Say you book a hotel room and then don’t show up. If you were going to pay cash for the hotel room and the hotel did not get a credit card number, then the hotel loses out on that money because you didn’t show up and they were not able to rent it to anyone else, this is why hotels require you to book with or at least put a credit card on file, this way if you don’t honour your booking and don’t show up, they charge your credit card anyway. Credit cards are a very convenient way of managing finances as they will provide users with a statement once a month of amounts spent and where the money was spent. However, credit cards also have the ability to be misused and many people find themselves in credit card debt if they do not pay off their balance owing each month. Credit cards historically charge high interest rates which means if you do not pay them off regularly, a person can find themselves paying hundreds of dollars in interest charges each month.

Personal Loans: A personal loan such as a car loan or student loan are simply just that. A bank will lend you money based on your income and credit history and as long as you qualify you’ll get the money. Other than students loans, generally banks require someone who wants a loan to have a job or some type of income (so they have the ability to pay back the loan) and a good credit history which means you may have had a loan or credit card in the past and have always made the payments as you should. So perhaps you want to borrow $10,000 to buy a car now. You apply at the bank and because you have a job and good credit history, they agree to lend you the money at 8% interest. You agree to pay the loan back over three years. Without going into the complexities of calculating loan interest, you would end up paying around $313 a month and your total interest cost for that loan over the 3 years would be around $1300, so the total amount you paid back would be $10,000 + $1300 = $11,300.

Line of Credit: A line of credit (also called a revolving loan) is kind of like a cross between a loan and a credit card. It is like having a loan for a certain amount available at any time (they usually have a credit limit like a credit card, a maximum amount you can borrow). You can use any amount up to the credit limit and don’t have to re-apply for the credit and you can use it for whatever you want as long as you make the minimum required payment on any money borrowed. For example, perhaps you have a $15,000 Line of Credit you have qualified for. You still want to buy the $10,000 car. Because that is below your $15,000 limit, you can take $10,000 from your LOC, buy the car and then pay back the money over whatever time period you like as long as you are making the minimum payment (which is usually just the interest amount).

Mortgage: A mortgage is a special type of loan for buying a home. They operate much like a regular personal loan where you borrow an amount and agree to pay it back over an agreed upon time at a given interest rate. But because the amount borrowed for a mortgage is generally quite large, and the loan is secured by the property (meaning if you don’t pay your mortgage, the bank gets to take your house and sell it) mortgages tend to be very long loans like 25-30 years, but they also offer very low interest rates, much lower than personal loans or credit cards.

Video: Middle School Money Matters 6-5 The Basic Types of Bank Accounts

Activity: Back to bank statements - go over the bank account statement from last lesson again together, review different examples of deposits and withdrawals. Have students complete the “Deposit or Withdrawal” and “Saving or Borrowing” worksheets supplied.

In-class/Homework/Extension Assignment:

1) Find out what is the most economical way to buy a list of items given various withdrawal charges.

2) Look up account types on a specific bank’s website. Decide which is the right package for you based on your current account activity. Talk about what the different banks offer in terms of accounts.

3) Have students go to an online loan calculator on one of the major bank websites and experiment with different amounts borrowed, repayment times and interest rates.